Cramer's Mad Money - 5 Mistakes Amateur Investors Make (12/30/09)

Includes: DIA, QQQ, SPY
by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Wednesday December 30.

Editor's Note: Wednesday's Mad Money program was a repeat broadcast of a show that last aired on August 2, 2009.

5 Mistakes Amateur Investors Make

Cramer says people who invest at home in their spare time can make as much money as professional investors, provided that they avoid the 5 biggest mistakes amateur investors make.

1. Being Fully Invested in Stocks. A lot of novice investors think that it is important to have all their money in stocks, but professionals know that having cash handy is important for buying stocks which have been unfairly beaten down. Every portfolio should contain at least 10% cash, and if that amount drops to 5%, something should be sold, unless the market is down so low that the only thing to do is to buy.

2. Concentrating Too Much on the Bullish Story. Almost everyone knows of a great stock with a huge upside potential. Amateurs think mainly of upside, but professionals think of the downside; "If you take care of the downside then the upside takes care of itself." Cramer likes buybacks and strong dividends, but mainly because these limit the downside in a stock and act as a buffer against declines.

3. Buying Hard-to-Understand stocks. New investors often think it is impressive to invest in a stock that is on the cutting edge of its field, but unless the potential buyer can explain what the company does in plain English, he should hold off and buy something easier to understand.

4. Being too Giddy about Gains: Most people who are new to investing may start to despair if they see losses, but huge gains in a short period of time can be more worrisome; "Any schmo can make a ton of money all at once," Cramer said. "All you have to do is take on way too much risk, and that's the heart of the problem." He added that if gains keep coming with no breather it is a sign that one's "portfolio is out of whack," and it is essential to start selling off the top and balance risk.

5. Being Obsessed with Earnings. Amateurs try to bet on a company's earnings, while professionals "learn to start living and stop worrying about the quarterly report." In fact, Cramer advises avoiding trading so much during earnings season, because trying to guess at gains or losses is "too hard." He urged viewers not to get lured into trying to game earnings results "because that is gambling, and when you gamble, the house always wins."


Seeking Alpha publishes a summary of Jim Cramer's stock picks every day including: Mad Money Recap, Lightning Round and his Stop Trading! Picks.

Get Cramer's Picks by email-- it's free and takes only a few seconds to sign up.

Seeking Alpha is not affiliated with Jim Cramer, CNBC or